Last week, August 12th, 2014, the Federal Housing Finance Agency, FHFA, issued a request for input on its proposed Single Enterprise Mortgage-Back Security, the Single Security. The structuring and issuing of a single security to market and guarantee GSE loans, is part of a larger strategy that is intended to develop a liquid, resilient, and sustainable secondary mortgage market which is attractive to private investors. The structuring of Single Security issued and backed by the Fannie Mae and Freddie Mac, the GSEs or Enterprises, would help on the development of a Common Securitization Platform (CSP) which would ultimately reduce operation costs of these institutions and facilitate a more dynamic marketization of the instrument and greater participation by private investors. The FHFA requests input from the public about this Security; deadline is October 13th, 2014.

THE MAIN GOAL OF THE PROPOSED SINGLE SECURITY

The use of a Single Security is intended to:

Maintain maximum market liquidity

Become a vehicle for the exchange of legacy Fannie Maes Mortgage Backed Securities, MBSs, and Freddie Macs Participation Certificates, PCs, and a conduit to fulfill to-be-announced, TBA, contracts

To achieve maximum market liquidity, the FHFA and the GSEs need to leverage existing security structures: encompass many pooling features of the existing MBSs and the disclosure framework of current PCs

THE KEY FEATURES OF THE PROPOSE SINGLE SECURITY [1]

Security issuer and guarantee structure: the structure would be the same purchase and guarantee framework of current MBSs and PCs. The Security would:

be issued and guaranteed by either of the GSEs

be a first-level securitization that would contain underlying mortgage loans acquired 100 percent by either of the GSEs

there would be no co-mingling of loans purchased by either GSE at this level of security formation

Common features: the Single Security would have common features that exists in the current TBA market:

a payment delay of 55 days

pooling prefixes

mortgage coupon pooling requirements

minimum pool submission amounts

general loan requirements such as lien position, good title, and non-delinquent status

seasoning requirements

loan repurchase, substitution and removal guidelines

Scope of the Security: the main goal of issuing a Single Security is to promote a highly liquid market for TBA-eligible fixed rate mortgages, and although the emphasis would be on the 30-year and 15-year loans, the 10-year and 20-year mortgages would be in scope

Multiple-lender pools: the Security would continue to enable the formation of multiple lender pools, currently known as Fannie Mae Majors or Freddie Mac Multi-lender pools, which would also enable participation of smaller banks

Re-Securitization: it would contain underlying first level securities, which could from either GSE or co-mingled.

re-securitizations could be backed by

single Securities issued by both Enterprises or just one of them

legacy securities issued by both Enterprises or just one of them

a combination of Single Securities and legacy securities, which could be issued by both Enterprises or just one of them

Disclosures: the disclosure framework of the proposed Security is closely aligned with the current Freddie Mac PC loan-and security-level disclosures, and it would also include standard frequency and timing of loan-and security-level disclosures to be made before and after the final settlement date

Selling and servicing guides: the Enterprises would maintain their separate Servicing and Selling Guides and continue certain alignment activities as outlined in the 2014 Strategic Plan and the Scorecard

The proposal alerts us to the importance of transforming existing securities issued by the GSEs into whatever become the new security. This is why, the proposal explains, it is important to maintain similar features in the whatever turns out to be the new Security.

THE INPUT

The FHFA is looking for input to develop a broad view of the range of public knowledge, opinions and ideas to the following questions:

What key factors regarding TBA eligibility status should be considered in the design of and transition to a Single Security?

What issues should be considered in seeking to ensure broad market liquidity for the legacy securities?

As discussed above, this is a multi-year initiative with many stakeholders. What operational, system, policy (e.g., investment guideline), or other effects on the industry should be considered?

What can be done to ensure a smooth implementation of a Single Security with minimal risk of market disruption?